Tacoma's turn: Arrival of State Farm moves city toward its new destiny

It has been a tough three years for downtown Tacoma since Russell Investments moved its headquarters to, of all places, rival Seattle.

When Russell announced that it was leaving, Tacoma leaders tried to put the best spin on the news. Bill Baarsma, then the mayor, said he was confident the city would be able to fill the hole left by the financial services company.

But it was a gaping hole, and not just because the company was taking 900 jobs — many of them good-paying ones — just as Pierce County was starting to climb back from the depths of the recession. This was Russell, whose history in Tacoma went back to 1936, when Frank Russell started a small financial brokerage in Tacoma. Russell Investments grew into a global company and had $151 billion in managed assets when it decided to relocate to Seattle.

Tacoma finally did land a big tenant this year, State Farm, which is leasing a total of around 288,000 square feet in two properties: all of the former Russell Center, a 12-story building that Frank’s grandson, George Russell, custom-designed, and four floors in the Columbia Bank Center, where Russell also operated. State Farm will operate 24/7 call centers in the buildings, opening sometime this quarter, State Farm spokesman Brad Hilliard said.

The arrival of State Farm, whose annual revenues of $65.3 billion put it at No. 44 on the Forbes 500 list, is a game-changer for Tacoma.

Ricardo Noguera, director of the city’s Community & Economic Development Department, said that State Farm is to Tacoma what Amazon.com’s growth is to Seattle.

But unlike Amazon and Russell Investments, State Farm’s offices in Tacoma won’t be a headquarters. And its entry-level call center workers will make roughly a third as much as the financial analysts at places like Russell.

So what will State Farm mean to Tacoma? Among other things, it will give the downtown a private-sector anchor, shrink the commercial vacancy rate and spur capital spending — including a new office tower rumored to be in the works.

But State Farm won’t turn Tacoma into Seattle.

If anything, State Farm’s move to downtown Tacoma further cements the city’s place in the region as the low-cost alternative to Seattle.

Comparing cities

The average annual asking rental rate in Seattle was $29.70 per square foot during the second quarter. That’s $10 higher than in Tacoma, according Kidder Mathews, though rents are expected to climb in Tacoma because of State Farm leasing so much space.

The “vast majority” of the jobs at State Farm’s pair of Tacoma call centers are going to be entry-level positions, said Hilliard. Annual salaries for the positions, which do include an employer retirement contribution, will start at $27,000 at one call center and $31,500 at the other.

That’s hardly on par with the sorts of jobs that Russell took to Seattle. Russell officials did not respond to an inquiry about how much their employees make but, according to the U.S. Bureau of Labor Statistics, the annual mean wage of a financial analyst in Washington state last year was about $86,000.

This wage disparity is not dampening spirits in Tacoma, though some people are keeping State Farm’s arrival in perspective.

“Is this going to be a panacea for Pierce County and Tacoma?” longtime commercial real estate broker Mark Clirehugh of Kidder Mathews asked, before answering that, “No, there’s still plenty of work to do — but it certainly is a step in the right direction.”

What’s important is that the company is bringing jobs, which is key for the county, where the economic recovery has lagged behind the rest of the region.

Pierce County’s unemployment rate peaked at 11.7 percent during the recession, according to the state Employment Security Department. Preliminary data show that the rate dropped to 7.7 percent in August, when the unemployment rate in the Seattle/Bellevue/Everett area was 5.2 percent.

Based on typical call center standards, State Farm’s 288,000 square feet of leased space could house around 1,775 employees.

Now there are rumors that State Farm may need even more space, according to Pierce County Deputy Executive Kevin Phelps and Clirehugh of Kidder. They said this could kick off construction of a new office building, which would be the first ground-up construction in Tacoma in about 12 years.

Hilliard, the State Farm spokesman, said he was unaware if the company is planning new facilities in Tacoma.

The job count puzzle

State Farm officials said earlier this year the company planned to ultimately employ 1,100 people in Tacoma. Last month, however, Hilliard said only that what is known for sure is that the company plans to have 500 new employees downtown by the end of this year.

As far as the estimate of 1,775 employees, Hilliard said, “You are kind of speculating there,” and added it “does seem high” but said “there could very well be” more State Farm employees in downtown Tacoma later.

The estimate of 1,775 is based on typical call centers renting around 165 square feet per worker. Hilliard said that not all call centers are the same, and he indicated some of the space that State Farm is leasing will be used for break rooms and training facilities. He added that while State Farm officials do not know exactly how many people the company will employ, “what we have is enough space to meet our needs as we see those.”

The Bloomington, Ill.-based insurer already has around 1,000 employees in another Pierce County town, DuPont, where the company occupies around 350,000 square feet of office space.

Tacoma’s destiny

Like every city, Tacoma has had its ups and downs, starting in 1873, when the City of Destiny beat out Seattle to become the Northern Pacific Railway’s terminus. The city later became headquarters to Weyerhaeuser, though decades later the timber giant moved to nearby Federal Way. A big blow came when Tacoma Mall opened in 1965 five miles south of downtown.

“It really plucked all of the major retailers out of downtown Tacoma. Suddenly (downtown) was dead,” said Mortenson Construction executive Kip Spencer, a Puget Sound commercial real estate industry veteran who grew up in Tacoma.

By the early 1980s, much of downtown Tacoma was blighted, presenting visitors with pulp-mill aromas and the sketchy storefronts typical of a harbor town.

“It was a smelly place” with “back-to-back porno shops,” said artist Lisa Kinoshita, who grew up in nearby Fife.

After the mall left, Tacoma began a long period of finding something to hang its economic hat on. The opening of the 23,000-seat Tacoma Dome was going to make a big difference. So were the launch of a short light-rail line and the renovation of Union Station into a federal courthouse, along with the building of several museums and a University of Washington branch campus. These amenities did help, and each was accompanied with a feeling that Tacoma was back.

But every step forward was followed by one back. Even Kinoshita, who said she is “a real Tacoma booster,” thinks so.

Last month, as she worked in a small downtown storefront where she is opening a gallery, Moss & Mineral, she said she moved from Seattle to Tacoma 10 years ago, “when the so-called downtown renaissance started to happen.”

She pointed to downtown’s many handsome brick buildings, such as the Pantages Theater across the street from her gallery, and said she is pleased that the city has preserved so many of them.

“For artists,” she said, “Tacoma is a great place.”

There’s broad-based community support for the arts, and rents are much cheaper than in Seattle, She is leasing the 400-square-foot space for Moss & Mineral for just $400 a month.

“But at the same time, Tacoma doesn’t seem to get a break,” Kinoshita said.

She is taking a wait-and-see approach to State Farm opening two call centers. “I don’t know how much of an effect it’s going to have,” she said.

$30.3 million upgrade

State Farm will give downtown an anchor, and this already is having an effect — starting in the buildings that State Farm is renting.

“They are putting significant tenant improvements in those buildings,” said city Business Development Manager Ellen Walkowiak. Permits filed with the city’s Planning and Development Services put the value of the work at more than $30.3 million.

Walkowiak’s boss, Noguera, said the turn of events will bring more people downtown, generating demand for retail and housing. More than 1,600 market-rate multi-family housing units are planned in Tacoma over the next two to four years, with 300 scheduled to break ground this fall, said Noguera, who chalks up some of this development to State Farm.

Commercial office rents are stabilizing, too, and investors are buying buildings. In 2010, the year Russell left, the dollar volume of downtown commercial building sales was only $1.3 million, according to Kidder Mathews. Through August of this year, it totaled $5.7 million.

Most of that volume was logged this spring when Howard McQuaid, vice president at Kemper Development Co., owner of the Bellevue Square, and some partners paid $4.8 million for a five-story building in downtown Tacoma at 1102 Broadway Plaza. McQuaid did not return calls, though he told Tacoma’s News Tribune that the purchase does not have anything to do with Kemper Development, which is headed by his father-in-law, Kemper Freeman Jr. He said his group bought the building and is remodeling it due, in part, to the momentum they see downtown.

It’s getting harder to find office space in downtown Tacoma, and rents are rising. In the second quarter, 13 percent of the space in the market was vacant, and that will fall to just over 8 percent when State Farm’s leases commence, according to Kidder’s Clirehugh. Brokers for the firm said that over the last year, annual asking rents for Class A space have gone up by about $1 per square foot to a maximum of $28. In addition, landlords now don’t have to give as many incentives, such as free rent, to lure in tenants.

Another Kidder office broker, Dirk Stegeman, said that once the space that State Farm is leasing went off the market, “all the people that were looking for 30,000 square feet no longer had that as an option.”

Phelps, the deputy county executive, said that from a psychological standpoint, State Farm’s decision to open offices, even if they’re just call centers with low-paying jobs, “just boosted the confidence level. Everybody likes to be wanted.”